Key Takeaways
- • More than half of private equity fund investors now expect zombie funds to proliferate over the next two years, a sharp increase from 28% of investors who anticipated such growth in 2024, according to Coller Capital's latest survey.
- • Zombie funds—where managers extend a fund's operational life beyond its expiration date to continue collecting management fees—are multiplying as prolonged deal lulls constrain exit opportunities and force portfolio companies to remain illiquid longer.
- • The shift in investor sentiment reflects growing concern that stalled dealmaking will trap capital in underperforming assets, creating extended holding periods that benefit managers' fee structures while generating minimal value for limited partners.
- • Zombie fund assets under management are estimated to exceed $1 trillion across the private equity industry, representing a significant portion of capital locked in extended fund lifecycles with limited exit prospects.
Summary
Private equity fund investors are bracing for a substantial increase in zombie funds over the coming two years, as prolonged market downturns and a muted dealmaking environment create conditions for extended fund lifecycles. According to a survey conducted by secondaries firm Coller Capital, more than half of fund investors now anticipate growth in zombie funds within their portfolios—a dramatic shift from 2024, when only 28% of investors expected such an uptick. This nearly twofold increase in negative sentiment signals deepening concern about capital trapped in illiquid positions.
Zombie funds represent a structural conflict of interest in private equity. Managers extend a fund's operational life beyond its contractual expiration date to continue collecting annual management fees on assets that may no longer be generating returns or near-term exit opportunities. As dealmaking remains constrained, portfolio companies struggle to find buyers, forcing fund managers to hold assets longer than originally planned. This dynamic allows fee collection to continue even when value creation stalls, benefiting manager economics at the expense of limited partner returns.
The scale of the zombie fund problem has grown substantially. Industry estimates place zombie fund assets under management at over $1 trillion, representing a meaningful portion of the total private equity asset base. The combination of slower exit velocity, higher interest rate environments affecting valuations, and reduced M&A activity has created a perfect storm for fund extension scenarios. Investors appear increasingly resigned to the reality that capital deployed in recent vintage years may remain locked up for extended periods.
For institutional investors, family offices, and other limited partners, this trend presents a dual challenge: illiquid capital that is no longer generating compelling risk-adjusted returns, alongside management fees that continue to erode net performance. The Coller Capital survey underscores a shift from optimism about near-term market recovery to expectations of prolonged fundraising and portfolio management challenges across the private equity landscape.
Zombie funds represent a structural conflict of interest in private equity. Managers extend a fund's operational life beyond its contractual expiration date to continue collecting annual management fees on assets that may no longer be generating returns or near-term exit opportunities. As dealmaking remains constrained, portfolio companies struggle to find buyers, forcing fund managers to hold assets longer than originally planned. This dynamic allows fee collection to continue even when value creation stalls, benefiting manager economics at the expense of limited partner returns.
The scale of the zombie fund problem has grown substantially. Industry estimates place zombie fund assets under management at over $1 trillion, representing a meaningful portion of the total private equity asset base. The combination of slower exit velocity, higher interest rate environments affecting valuations, and reduced M&A activity has created a perfect storm for fund extension scenarios. Investors appear increasingly resigned to the reality that capital deployed in recent vintage years may remain locked up for extended periods.
For institutional investors, family offices, and other limited partners, this trend presents a dual challenge: illiquid capital that is no longer generating compelling risk-adjusted returns, alongside management fees that continue to erode net performance. The Coller Capital survey underscores a shift from optimism about near-term market recovery to expectations of prolonged fundraising and portfolio management challenges across the private equity landscape.
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